Why should you open a bank or brokerage accounts abroad? Because it gives your investment portfolio higher returns and lower risks. How?

​(1) It gives you access to much more investment options not available is your home country. For example, the US accounts for roughly 50% of the world's stock market capitalization. It has the larger number of companies listed and a highly liquid market, which decreases risks of not having a buyer when you want to sell your stock or a seller when you want to buy it. However, the London stock exchange is the most international in the world with approximately 2,200 companies from more than 70 countries represented. Brokerage firms in the Europe allow customer to buy and sell assets in more than 20 countries without losing money by constantly having to exchange currency.

​Why do I need more investment options?

The best academic studies have repeatedly observed that investors have a Home Bias. They tend to allocate an amount of capital in their home country far greater than forecasted by the most developed financial models. Investors are often willing to pass on higher gains and lower risks to invest in their home country. For example, US investors’ portfolios have, on average, lower financial returns and higher risks than the simple market-value-weighted index of foreign stocks. In other words, the average investor would be clearly better off by investing in a portfolio where stocks are simply allocated according to the respective total capitalization of each country. This is a world-wide empirical observation, which is not limited to the US. French investors hold 92% of their funds in French companies despite the fact that the market value of all French common stock is only about 3% of the world total. Similarly, German investors overwhelmingly concentrate on Germany, Brazil investors on Brazil, and so forth. Investing abroad, however, was supposed to be the norm rather than the exception.​Professors Malkiel (Princeton) and Mei's (New York University) book, "Global Bargain Hunting," suggests that the optimum portfolio (for a risk averse investor) of U.S. and other developed country ("foreign") stock is 30/70. Compared to a 100% US ("domestic") portfolio, purchases of other develop country stocks adding up to 30% of total investment portfolio increases the annual returns of the investments and lower the risks, as it is possible to see in the graph below. So, 30/70 should be a no-brainer when compared to 100% domestic portfolio. 100% domestic is not an optimal portfolio for any set of preference. More than 30% exposure to other developed country stocks continue to increase the returns but also increases the risk (i.e. volatility) of the investment. Hence, an 100% foreign portfolio would be optimal for a risk taker investor as it would lead to the highest average annual return in the long run.

Optimum Stock Portfolio of US and Developed Country Stocks

​Paradoxically for many, the introduction of up to 30% in riskier assets (i.e. other developed country stocks) increase the safety of the portfolio. That happens because international markets are not perfectly correlated. So, if one market goes into tailspin, the resulting losses will be counterbalanced by stability, or even positive developments, on other markets, even if the other markets are riskier. For example, a portfolio consisting of 1 country's stocks tend to go systematically down in periods of national economic crisis since the correlations between the firms are very high. A portfolio of multiple countries' stocks, on the other hand, would have much less variation since not all countries are in crisis together and even if they are the intensity of the crisis varies in each state. Harry Markowitz won a Nobel prize for showing this paradox, the purchase to risky investments can produce higher profits AND greater protection against loss.

Does it mean you will never lose money if you buy foreign market assets? Not necessarily. What it does mean is that broad diversification protects you against the ups and downs of markets that can lead to negative results, i.e. "risk".

Why you should consider to allocate part of your investment in emerging markets?

Potential gains from investing in emerging markets are especially high and their risks are increasingly low. As nobel winning economist Robert Lucas points out, emerging markets have much lower capital-to-labor ratio, so according to the standard neoclassical model we were supposed to see major flows from rich to poor countries. However, that does not happen (i.e. The Lucas Paradox). US market capitalization alone accounts for 53.4% of the world’s capitalization. The next 5 largest stock markets are Japan (7.9%), UK (6.6%), France (3.4%), Switzerland (3.2%), and Germany (3.0%). Meanwhile the Chinese equity market, for example, is about the same size as Hong Kong. All other emerging countries have capitalizations smaller than Singapore (Bank of America Merry Lynch, 2015). Nonetheless, stocks in the developing countries have been giving much higher returns than rich states' stocks for decades and this trend is expected to continue for a long time. From 2000 to 2018, for example, emerging markets stocks have given investor 8.65% yearly returns on average, while the world on average has given 4.94% returns (MSCI, 2018). ​

Note: The MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries*. With 1,151 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries*. With 2,787 constituents, the index covers approximately 85% of the global investable equity opportunity set.

Although emerging markets are riskier than developed countries, they also decrease the risk of rich states only portfolio for the same reason as developed countries improve US portfolios. Emerging markets stocks are not perfectly correlated with rich countries stocks. So, economics downturns in rich countries, for example, may affect emerging markets less, such as in the 2008 crisis. Therefore, according to Malkiel and Mei historical data, risk averse investor should have their optimal portfolio consisting of 61% US, 26% other developed markets, and 13% emerging market stocks. No combination of developed country only portfolio is safer than that. Risk takers would just put all their investment in emerging markets since they have the highest returns on average.

Optimum Stock Portfolio of US, Developed Country Stocks, and Emerging Markets

We believe that the Home Bias phenomena as well as the Lucas Paradox happens partially because investors tend to have more information about national regulations and procedures, greater familiarity with their native language and customs, and more knowledge about local investment opportunities. So, individuals tend to invest in their home country. Here at Moraya Consulting we try to diminish these natural barriers by providing the most advanced knowledge in the field so that clients can take the best possible decisions given their individual risk-reward preference.

​IMPORTANT: THERE IS NO TAX OR INVESTMENT STRATEGY THAT IS CLEARLY BETTER. IT ALL DEPENDS ON YOUR GOALS AND RESOURCES.

For example, are you willing to move abroad? If so, where? How long do want to stay in each place? What is your annual income? How much money are you willing to invest? Do you want short term gains or long term investments? What is (are) the source(s) of your income? How much taxes do you pay annually? Do you want to decrease your tax duties or completely remove it? Do you feel like you want to pay some taxes even if you do not need to? What is your citizenship? Do you have multiple citizenships?​Depending on each of these answers the best investment/tax strategy for you will differ. In order to see what option is best for you and to help with the implementation of the strategy feel free to reach out to us.

You do not need to be rich to create a global investment portfolio. Most of the bank and brokerage accounts we open do not have minimum initial deposit or maintenance fee. Thus, you can invest as much as you want or even leave the accounts empty until you have enough capital or interest to invest abroad.